An obsession with compliance is damaging business results
Over 60% of contracts are non-compliant with corporate standards.
This was one of the statistics that emerged during a webinar IACCM ran this week with Seal Software. It is based on analysis of more than 1o million contracts handled by Seal in the last 3 years. As Ulf Zetterberg, CEO of Seal Software, observed, the shocking part about this statistic is not so much that the variation rate is so large as that companies are simply unaware. In some cases, their ‘standard term’ is used far less frequently than the alternates. They spend so much time battling over individual exceptions that they lose sight of the bigger picture.
The webinar was full of data coming from both IACCM and Seal, demonstrating the power that contract analytics can deliver to the business. For example, we looked at management perceptions of the contracting process and of the functions – contract management, legal, procurement – responsible for contract production and negotiation. This identified areas for improvement, such as weaknesses in innovation or the leadership of change. Less than 50% see these functions as a source of innovative ideas and nearly 80% feel they are always or sometimes too risk averse. It found that Procurement, in particular, is frequently perceived as far too oriented towards compliance and lacking commercial judgment. It also revealed how bid-to-signature cycle times are on average lengthening, with increased review and approval the major cause.
The gap in performance between best and worst performing companies is increasing. Measures such as frequency of claims, percentage of underperforming contracts and extent of value leakage were among the indicators used to illustrate the benefits of high performing contract management. Indeed, as I reported earlier this week, an increasing number of executives are recognizing the strategic importance of contract management and in particular how past investments in Procurement have in many cases eroded the value achieved from contracts and trading relationships.
At its heart, this webinar was about data and analytics. It was illustrating how the fragmentation of the contracting process creates blindness to key insights. The consolidated performance data from this process provides a powerful source of management information – but most organizations do not even realize what they are missing. An obsession with compliance results in a measurement that is frequently meaningless and often damaging to business results.